As mentioned in a previous column, it’s difficult to have a housing slow down when there is very little inventory. That’s why housing bubbles are viewed as regional occurrences and not as national trends.

But inventory is only one component. What has become more of a factor is the incredibly flexible loan programs offered by many lenders. When a buyer can get 95 percent-100 percent financing on an investment property with stated income and a lousy credit score, it becomes a roadmap for trouble – especially in a flat market. Here’s why:

When a buyer purchases an investment property with very little or no money down, there’s no margin for error when the renter bolts in the middle of the night because of a job loss or death in the family. The renter was basically paying the owner’s mortgage, taxes and insurance with the monthly rent check. When no new renter surfaces and the place goes vacant for a few months, the owner quickly tires of coming out of pocket with the mortgage for the investment home and simply walks away from the deal.

Lenders are floating a carrot and there’s nobody to save over-eager consumers from themselves. An example is a recent advertisement in California “Buy the home you want…not the home you can afford!” American consumers are spending while also having one of the lowest savings rates in the world.

While we also lead most of the world in percentage of home ownership, appreciation is no longer floating all boats in all regions of the country. Some areas of Ohio, Indiana, Texas, Michigan, Georgia and Colorado have been absolutely flat and haven’t even rendered enough appreciation to pay the closing costs for a seller who bought in 2003. The bottom line is that foreclosures are up in areas that once were strong, and lenders are getting more REO (real estate owned) property back on their books.

“I don’t think the tsunami of REO is not going to hit the coast,” said Tom DiMercurio, a veteran of 35 years in the foreclosure business. “But it’s going to become very apparent in places like Denver where there’s too much credit chasing poor borrowers.”

DiMercurio, former president of Fidelity National Asset Management Solutions, was the brains behind BuyBankHomes, a site that provides foreclosure information to interested parties such as consumers, investors and real estate agents. He recently started Denver-based The Mercury Alliance, which offers conventional REO sales, management services, plus Internet auctions. He said his 10-block route to work is filled with “for rent” and “for sale” yard signs that were nonexistent three short years ago.

“It’s going to get worse and just not here,” DiMercurio said. “When rates go up a little bit, it’s going to hurt even more. It’s like buying a car. People have been so used to zero financing that they are going to balk when traditional rates return.”

ForeclosuresMass, a provider of Massachusetts foreclosure data for investors, real estate professionals and mortgage brokers, recently reported that its August 2005 list of foreclosure filings were up 29 percent above 2004 levels. Increases were taking place in all but one county.

“This is evidence that skyrocketing housing prices, rising interest rates, complex loan arrangements and a relatively flat economy are combining to cause difficulty for thousands of homeowners,” said Jeremy Shapiro, president and co-founder of ForeclosuresMass.

DiMercurio was asked to give a broker price opinion on a well-kept home in a nice Denver-area neighborhood. He said all of the three comparable sales that he used to arrive at his selling price were all foreclosed homes.

“I’ve never seen that before in any neighborhood.”

Bill Lang, who left international real estate services company Kennedy Wilson to start real estate auction house LFC Marketing Services, is so convinced that the volume of upcoming foreclosures will rise so dramatically that he’s started Web sites for residential and commercial property foreclosures.

It sounds like people in the know are preparing for some inventory in the near future. Unlike the past four years, that inventory will be the result of consumers who no longer can afford to pay.

Tom Kelly’s new book “The New Reverse Mortgage Formula” (John Wiley & Sons) is now available in local libraries and bookstores. Tom can be reached at news@tomkelly.com.

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